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Introduction
Investment plays an important role in the economy. Because changes in the level of investment can bring about changes in the level of economic activity and economy growth can result in lower unemployment and higher standards of living. According to Dixon & O’Mahony, investment can be defined as the spending on new capital equipment and inventories by business sector (Dixon & O’Mahony, 2004). And economic activity can be defined as the total level of output of goods and services over a period of time (Dixon & O’Mahony, 2004). There are many factors determining the level of investment and increasing in business spending can increase the level of economic activity.
Interest Rates
A change in interest rates is the most important factor influence business investment. Interest rates refers to the cost of borrowing to purchases fund for business investment (Dixon & O’Mahony, 2004), therefore a decrease in interest rates result in the lower cost of borrowing funds, so that business can invest more in new capital equipment. Figure 1 illustrates that if interest rate fall from 5% to 4%, the planned investment increase from $100 billion to $120 billion (Taggart, Findlay & Parkin, 2003, pg.493). And this business investment curve shows that interest rates and investment are inversely related.
Tax Provisions
Also a change in the government policy can influence business spending on investment, such as altering tax provisions (Dixon & O’Mahony, 2004, pg 130). For example, Baumol and Blinder reported that many Republicans want to reduce the tax on capital gains, which would bring about greater investment spending. Moreover, Baumol and Blinder said, the United State ...